Bear Market, Managed Futures Funds Held Up in August Downturn

While the S&P 500 Index plunged 9.43 percent during the week of Aug. 17, bear market funds gained 14.52 percent, and managed futures funds were up 0.21 percent, according to Morningstar data.

But it doesn't mean advisors should run out and pile their clients into bear market funds, writes Josh Charlson, Morningstar’s director of manager research for alternative strategies.

“Morningstar believes that bear-market funds have a limited place in investor portfolios, given that the long-term direction of the stock market is upward," Charlson said. "The bear-market category still has a negative 20 percent annualized return over the trailing five years through Sept. 30, 2015.”

While many alternative strategies promise protection when the market’s down, all other alternative fund categories, including long-short equity, multialternative and market neutral, were in the red during the August downturn, Morningstar said in its recent Alternative Investments Observer. But these funds still outperformed the S&P.

You can’t expect these funds to be completely unaffected by market swings, writes Charlson.

“Most of the funds in Morningstar’s alternative categories do have some exposure to the markets—sometimes through direct stock market investments, or at times through exposure to other global asset classes correlated to equities—so in a sell-off as widespread and steep as we saw in late August, it’s unreasonable to expect complete immunity,” he writes.

Long-short equity was the biggest loser in late August, with that category down 4.8 percent, Morningstar says. But that’s right on schedule, Charlson says, given that the average beta for the category has been around 0.5 during the past three years.

The AQR Managed Futures Strategy was one standout performer during the period, with a return of nearly 5 percent. The firm’s AQR Managed Futures HV (high volatility) was up 7.2 percent.

In general, advisor interest in alternatives has been rising, according to Morningstar. In 2014, 63 percent of advisors allocated more than 11 percent to alternatives, up from 39 percent of advisors in 2013. In the last 12 months, alternatives funds have seen $13 billion in inflows.